Leaf Group Ltd.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Good afternoon. My name is Kristine, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Leaf Group Fourth Quarter 2016 Earnings Call. Jeff Misthal, Senior Vice President of Finance and Investor Relations, you may begin your conference.

[Jeff Misthal:]

Good afternoon, everyone. On behalf of Leaf Group, welcome to our Q4, 2016 and full year 2016 conference call. I am pleased to have Sean Moriarty, our Chief Executive Officer; and Rachel Glaser, our Chief Financial Officer, on the call with me today. Following the Safe Harbor statement that I will make, Sean will update you on our business, and then Rachel will provide details on our fourth quarter and full year financial performance and key operating metrics. Any metrics discussed on the call without reference to a specific third party source are based on our internal data. After the prepared remarks, we will open up the lines for Q&A. You will find a related release along with supplemental materials posted on the investor relations section of our corporate website located at ir.leafgroup.com. Before we get started, we need to make the following Safe Harbor statement. We would like to remind everyone that during today's conference call, management will make certain forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from our current expectations discussed in such forward-looking statements. In particular, comments about our anticipated future revenue, earnings, operating expenses, operating metrics, and growth rates, as well as statements regarding our business strategy and objectives, plans, intentions, operating outlook, and planned investments, are considered forward-looking statements. Factors that could cause actual results to differ materially from anticipated results are detailed in our press release, furnished to the SEC. I would like to point out that during this call, we will discuss certain non-GAAP financial measures, while talking about the company's financial and operating performance, including adjusted EBITDA and free cash flow. We will also state certain financial results on a pro forma basis, eliminating the impact of the dispositions of our Cracked business and certain other non-strategic online properties. Reconciliations of these non-GAAP and pro forma financial measures to their most directly comparable GAAP measures can be found in the financial tables included at the end of our press release. Lastly, I would like to remind everyone that today's conference call is being recorded and that it is also available via webcast and replay through the investor-relations section of our corporate website. With that I'll now turn the call over to our CEO, Sean Moriarty.

[Sean Moriarty:]

Thank you, Jeff, and thank you everyone, for joining us this afternoon. We appreciate the opportunity to update you on our fourth quarter results, and what is planned for 2017. In Q4, we announced our new corporate name Leaf Group, which represents growth and opportunity for our brands and fittingly Q4 marks our second consecutive quarter of revenue growth, up a solid 9% year-over-year on a pro forma basis. With our transformation well underway, we continue to pursue our mission of building creator driven brands for passionate audiences in our design and life style categories. We are pleased with the progress made in Q4 to further this mission in both our marketplace and media businesses as we continue our transition from a search reliant media company to a diverse portfolio of brands, each focused on building great products. Today, I will focus my remarks on three areas. First, a review of our marketplace businesses, which demonstrated strong growth in revenue and continued to expand the world class products and services they provide. Second, an update on our media businesses, highlighting another strong quarter for LIVESTRONG, and continued positive signs of growth in our new vertical category strategy with eHow. Finally, I will touch on our 2017 initiatives and why we are confident about future growth. Rachel will follow with more detail on our financials. Starting with our marketplace businesses, we had another strong quarter. Q4 revenue grew 23% year-over-year to $22.6 million, representing 67% of our total revenue. Let me break that down into the two primary marketplaces that we operate. In Q4, Society6 revenue grew 20% year-over-year, with a total number of transactions growing 28% and traffic to the site increasing 14%. Q4 growth was driven by Society6’s record setting Cyber Weekend, which runs from Thanksgiving through Cyber Monday when Society6 generated its highest GTV for a 5-day period and included its biggest all time GTV for a single day. Society6 is our strong traffic and conversion on its own site during the holiday period and continued strong growth on its Amazon Marketplace. Society6 introduced a number of holiday promotions in the quarter and what was widely regarded as a high watermark and promotional activity in the retail industry in general. For Society6, this had the effect of increasing transactions, but lowering average order value by 5% year-over-year in the fourth quarter. Throughout Q4, Society6 continued to build brand awareness and grow traffic through marketing efforts across multiple channels. Email traffic grew 142% year-over-year, fueled by subscriber growth, optimized lifecycle email campaigns, and curated trending product collections. Traffic from paid search grew 39% in the quarter, driving new customers to the site through targeted marketing efforts. In Q4, these efforts contributed to Society6 successfully growing customers by 27% or repeat customers also grew by 30%. Because Society6 sees strong repeat customer rates, we believe these newly acquired customers will yield returns in future periods in significant long-term value. Society6 also sent its first every holiday catalogue to over 250,000 existing and perspective customers and our target demographic in Q4. The initial results were encouraging and we expect this catalogue to be the first of a variety of offline marketing channels that we plan to invest in during 2017 to complement our online efforts. The Net Promoter Scores for the Society6 brand are excellent and we expect 2017 to be the year in which we build meaningful brand awareness for Society6 and its product offering. Ahead of the holidays, Society6 rolled out several platform improvements that increased site performance and purchase conversion during our peak season. We are also particularly pleased with the team’s expert management of its network of fulfillment partners over the holiday season. More than 0.5 million products were ordered over the holiday period and 90% of these items were produced and shipped within four days. Society6 launched four new products during Q4; clear iPhone cases, comforters, metal travel mugs, and notebooks. And based on the platform development work completed in 2016, Society6 is now able to rapidly expand categories and introduce new products. At the end of Q4, Society6 had a total of 36 products, over 230,000 artists and over 3.6 million designs available on the site. With increasing traffic and brand awareness, a loyal repeat customer base, a growing product assortment, and an improved artist upload and publishing platform Society6 is well positioned to drive strong growth in 2017. Our Saatchi Art marketplace also had a solid quarter with revenue up approximately 28% year-over-year. Transactions were up 35% and Saatchi Art experienced increasing demand and much higher conversion rates, both new and repeat customers grew roughly 36% year-over-year and traffic from social sources increased significantly. Saatchi Art also had a strong holiday season with its most successful two-week period ever, sparked by its holiday ready the promotion. With meaningful advances in marketing, design, and operations, year-over-year GTV nearly doubled over Cyber Weekend, propelling Saatchi Art to record revenue and new buyers in November. Saatchi Art continues to see significant growth in its art advisory business, a free service that provides collectors with personalized recommendations from our team of expert curators. Customers who transact in the art advisory funnel have higher conversion and repeat buyer rates. During Q4, Saatchi Art continued to build brand awareness through influencer campaigns, direct mail catalogues, and inserts. Saatchi Art also released its 2016 addition of Invest in Art, a comprehensive report on the emerging art market that also showcased some of the hottest up and coming artists from across the globe. As discussed on our last call, in July we purchased The Other Art Fair. U.K.'s leading art fair for discovering emerging artists. Saatchi Art's collaboration with The Other Art Fair, officially launched in October with the London and Sydney fairs and included cross marketing and co-branding efforts. The Sydney Fair performed ahead of expectations, more than doubling art sales from a year ago. In 2017, The Other Art Fair will present seven fairs and expand its presence to the United States. There is high demand amongst artists to exhibit at these fairs and we have already sold out exhibit space for the London Fair in April. Turning now to our media business, which includes our portfolio of approximately 45 websites ranging from our largest properties LIVESTRONG and eHow to a network of smaller sites that we either own and operate, or host for and operate with our partners. Media revenue came in at $11.4 million, representing 33% of our total revenue for Q4. While down 12% year-over-year on a pro forma basis, media revenue remained flat quarter-over-quarter reflecting our success in stabilizing our media brands. The shifts and strategy we’ve made to our media business over the last few quarters continued to show positive signals. Our media brands collectively had well over 0.5 billion video streams in 2016, up 34% year-over-year. In Q4, we increased our investment in creating original programming and produced over 1000 pieces of new content, including over 200 videos. This new content helps fuel growth in our newest media properties, as well as our foundational brands eHow and LIVESTRONG. As a whole, our media properties had over 215 million average visits in Q4, down just 1% versus the previous quarter, as growth in our core properties was offset by lower traffic to our international sites. LIVESTRONG continues to demonstrate upward momentum for the fourth straight quarter with visits up 18% year-over-year. Our focus on building relationships with the top names in wellness and fitness has yielded great content, including new interviews with Deepak Chopra and Jillian Michaels, and videos with multiple online fitness celebrities, including Lisa Morales Jen Selter and Natalie Joe, who have a combined following of over 15 million consumers who are passionate about fitness and wellness. In Q4, eHow expanded its audience reach by working with industry leaders and providing content that resonates with their users. eHow partnered with Amazon this quarter to bring it eHow’ daily series to the Amazon echoes millions of users, as well as partnering with Pinterest to be among the first to launch videos in their new native video player. eHow also grew its Facebook followers to 1 million, an increase of 19% quarter-over-quarter and 71% year-over-year. When looking at eHow traffic combined with traffic to our newly launched vertical brands, we show a 12% net growth in visits quarter-over-quarter. As audience grows and content improves, we also expect monetization to improve in 2017, as we are able to sell more of our inventory on these properties, the direct brand advertisers, and move up the add stock to higher CPM's. Our much improved and more diversified portfolio of media brands is well positioned for success in 2017. We intend to continue migrating high quality category specific content from eHow to new properties with a narrower and deep focus on a single vertical category. Our product and editorial teams are producing fresh new content to augment and enhance the existing content on these properties, while creating engaging user interfaces and experiences. We have several of these migrations planned in 2017, including in the home category. For all of our media brands, we will continue to focus on growing audience across multiple platforms to make these brands increasingly attractive to advertisers, as well as to our nearly 15 million monthly users per comScore. We are also excited about the 2017 initiatives underway for our marketplaces. Top line growth, expanding gross margins, and acquiring and retaining high quality customers are our highest priority priorities. With that in mind, our investments in 2017 will be focused on increasing brand awareness, running our product offering, and developing our global businesses. We look forward to updating you on our progress with these initiatives as the year continues. Overall, we are truly excited to be telling you about growth in our media and marketplace businesses in Q4, as we move past the transformation stage and focus on building Leaf Group from a now solid foundation. I will now turn the call over to Rachel for prepared remarks regarding the financials.

[Rachel Glaser:]

Thank you, Sean. I'm pleased to take you through our fourth quarter results. I’ll start with the headline financials. Before I dive in, let me clarify that all references to revenue in my prepared remarks, will be stated on a pro forma basis, net of our dispositions of Cracked and certain other non-strategic properties. A reconciliation of our pro forma revenue to GAAP revenue for the relevant periods is available in our earnings release. Additional information on our key operating metrics is included in our earnings release. Now, onto our Q4 results. First, total revenue in Q4 was $33.9 million, up 9% year-over-year on a pro forma basis. Our marketplace businesses grew 23% year-over-year, while the media business declined to 12% year-over-year, but is flat versus prior quarter. Second, adjusted EBITDA was negative $2.6 million in Q4 versus negative $0.9 million in the prior-year period and negative $1.7 million in the prior year period on a pro forma basis. Third, free cash flow was negative $0.4 million for the quarter, reflecting our Q4 EBITDA, seasonal working capital changes, and normal capital expenditures in the quarter. Starting with revenue let me dive a little deeper into our financials. We can clearly see the positive impact of our transformation efforts. Media revenue was flat quarter-over-quarter, our marketplace businesses continue to grow at a strong pace with revenue up 23% year-over-year to $22.6 million. Overall for the company, revenue grew 9% year-over-year on a pro forma basis and was up 21% versus the third quarter. Drilling down on the marketplace businesses first, total revenue was $22.6 million in Q4, up 23% year-over-year, a significant growth rate when compared to other companies in this sector. This revenue growth was driven by 20% year-over-year growth in Society6 and 28% growth for Saatchi Art. As Sean discussed, we are making good strides on our key initiatives in the Society6 business, including expanding our product assortment and investing in marketing and customer acquisition. We are continuing to ramp our investment in paid marketing channels for Society6, which is proving to be a good lever for driving new visitors to the site. Yield on this spend may lag the investment by one to two quarters and therefore has a short-term negative impact on EBITDA. We expect that our incremental spend in the second half of 2016 brought new customers to Society6 who will be repeat customers in 2017. Furthermore, we attracted visitors to the site registered with an email and to whom we are now able to send product and artwork updates, promotional offers, and direct mail such as catalogues. All of our marketing efforts enhanced brand awareness and should continue to drive solid traffic growth in 2017. We were pleased with the overall growth in Society6 during Q4. To put our performance in the context, the five days from Thanksgiving to Cyber Monday saw 32% growth in gross transaction value versus the prior year period, approximately two times the industry average according to data published by Adobe Digital insights. There were two trends in Q4 that had a noteworthy impact on Society6's performance. First, the retail industry experienced exceptionally high promotional activity during the holiday period. From November 1 to December 18 transactions using promotions surged 131%, as compared to the prior-year and accounted for more than half of all transactions according to dynamic action, a retail analytics provider. Society6 participated competitively in those promotional offers to increase traffic and conversion and acquire high-quality new customers. This had the impact of driving average order value down, leading to lower gross margins, which we define as revenue less product cost, RS payments, and shipping and transaction cost. Gross margin for Society6 was 26% in Q4, down 3 percentage points from 29% in the prior-year and down 12 percentage points from Q3. Though this average order value dip followed us into January, it has now rebounded in February to our normal pre-holiday levels. Second, increases in mobile usage had some impact on total gross transaction value. The conversion rate on mobile is lower than our desktop, and the average order value on a mobile transaction is also lower then our desktop. In Q4 mobile business increased 35% versus prior year rising to 46% of total visits, while mobile transactions increased 40% versus the prior year. We are continuing to optimize the mobile checkout experience and in Q4, we saw a 4% improvement in mobile conversion rate versus prior year. We continue to focus on gross margin expansion in the Society6 business. Our international localization strategy should increase conversion rates through local currency presentment, reduced shipping, costs and faster delivery speeds, while decreasing product cost to competitive vendor selection. Since the start of 2016, we have consolidated our US Vendors from 9 renders to 6 leading to reduced costs and increased scale efficiencies. We have overhauled our platform to enable much better product marketing and merchandising capabilities and within several quarters we will have the flexibility to upsell and cross sell that should improve conversion and average order value. We are also improving the sophistication of our assortment planning and product pricing efforts leveraging what we learn from this holiday seasons significant promotional activity. Saatchi Art also had another strong quarter with revenue up 28% and visits up 16% year-over-year in Q4. Sustained growth and conversion rates was helped by several key initiatives in the fourth quarter, including improvements in the platform and the optimized checkout experience, the latter of which happened in late December and should have a positive impact in 2017. We also had another catalogue drop, which hit 250,000 homes in October along with a holiday campaign that involve direct mail to our best customers and help to drive conversion rates up 17% year-over-year and 16% versus Q3. Higher conversion rates lead to significant year-over-year increases in gross transaction value defined as the total value of the art or prints sold, up 31% and transactions up 35%. This is consistent with data we have seen suggesting that the online art market is growing robustly. Lastly, this quarter, we included The Other Art Fair and our total marketplace revenue. A quick note for your models; the operating metrics for our marketplace businesses included in our earnings release, mainly transactions and revenue per transaction, exclude the revenue from this young business. Turning to a review of our media business, average monthly visits to our media properties in Q4 were $215 million, up 3% on a pro forma basis versus prior year and down 1% versus prior quarter. Approximately 56% of these visits came from mobile. With significant reach and content engagement occurring of our own properties, in Q3, we introduced video views and social followers as two key operating metrics to look at audience and engagement. In Q4, total video views for all of our media properties were 136 million, up 8% versus prior year. At the end of Q4, our media properties had over one 12 million total followers across Facebook and Pinterest, Instagram, and Twitter. Looking at performance by property LIVESTRONG had another strong quarter. LIVESTRONG grew revenue 20% year-over-year and was up 3% versus Q3. Year-over-year LIVESTRONG visits were up 18% in Q4 with mobile growing 39% and desktop declining 13%. Since mobile eCPMs are approximately 25% to 30% lower than desktop eCPMs the strength of mobile traffic growth creates some headwind on revenue growth. We have seen an uptick in the sell-through rate for direct brand on our LIVESTRONG property. As a result, the RPV for LIVESTRONG increased 12% quarter-over-quarter in Q4. We continue to see promising signs of growth with our new eHow vertical strategy. Traffic to the eHow sites inclusive of these new vertical properties was up 12% versus prior quarter and down 13% versus prior year. Average monthly visits across all of these properties in Q4 were $43 million. While the initial RPV on the new verticals was approximately 50% of the RPV on eHow.com, we have already seen RPV begin to rebound for these sites in the short time since they launched. Revenue for the combined eHow sites increased 5% versus Q3. This is the first quarter in two years that both traffic and revenue were up on a quarterly sequential basis and is a positive sign that we have truly rounded the corner in this transformation. We expect RPV for the new vertical sites to increase in future quarters as we optimize the yield on those pages and as the size of the audience on the vertical properties become more meaningful to direct brand advertisers. Revenue per visit for our media properties was $17.57 for Q4, down 18% versus prior years, however flat versus Q3. We were pleased with RPV remaining flat quarter-over-quarter because we expect a lower RPV on our new vertical properties to lead to a lower overall RPV. However, our branded sales pipeline has been strengthening since the formation of our direct brand sales team and higher sell-through rates on programmatic and direct have helped to stabilize RPV. We continue to attract large Fortune 500 brands as advertisers on our properties and the repeat and recurring nature of these ad buys is testament to the quality of our intent driven audiences and the return on the spend. The balance of our media revenue was 4.6 million, down slightly versus prior year, due to continued revenue declines from our international media sites, as well as the studioD business, which we exited in Q4 2016, offset by increasing revenue for our hosted content offerings. We are encouraged by the traffic and revenue momentum we see in our media business. Over the next one to two quarters, as we continue to migrate content from eHow.com to new independent vertical properties there could be a revenue headwind from lower RPVs as we experience with each category we migrated so far. Offsetting this RPV impact, we expect traffic improvements on each of these new properties. To provide a specific example of what we experience, we migrated to [e-mail]. We saw nearly a three times lift in visits to the migrated content within the first month after Cuteness was launched. After an initial dip in RPV, overall RPV for Cuteness increased 58% from Q3 to Q4. Before moving on to adjusted EBITDA, as I did last quarter, let me take a few moments to bridge the differences in our GAAP financial reporting and our business unit results to be certain they are well understood. As described in detail in our 10-K GAAP revenues are recorded as product revenue and service revenue. Product revenue includes all of the revenue from Society6 and revenue from the sale of prints on Saatchi Art. Service revenue includes all of the revenue from our media business as well as the commission we receive from the sales of our regional art on the Saatchi Art marketplace. On the cost side, product costs are primarily driven by outsourced production costs for Society6 and artist royalty payments. Service cost include our data center and Internet serving costs, expenses related to content creation for certain content units, and customer service costs. As we have discussed on prior calls, we have made significant strides in reducing our operating expenses by consolidating data centers and reorganizing our content publishing studio. These cost reductions were evident in the service cost line, which were 42% of service revenue in Q4, down from 48% in the same period last year. The change in the mix of our revenue drives changes in the cost structure. We wanted to call this to your attention as you think about the trajectory in our business going forward. Now, turning to Q4 adjusted EBITDA, Q4 marked roughly a $2 million decline from a year ago and a roughly $1 million decline on a pro forma basis, as revenue growth and cost savings initiatives were offset by higher promotional activity at Society6, headcount additions in our marketplace businesses, and higher levels of marketing investments to expand brand awareness, and paid customer acquisition at both Society6 and Saatchi Art. Overall, our Q4 non-GAAP operating expenses calculated as GAAP operating expenses less based compensation, depreciation and amortization, and excluding product costs, which vary with revenue were $21.1 million, down $2.1 million from the prior year. As a reminder, approximately 75% of our cost base directly supports business operations and roughly two-thirds of that is variable with revenue, primarily product costs related to our Society6 business. The remaining 25% of our cost base is corporate overhead cost required to run this public portfolio company. We believe these overhead costs are relatively fixed in nature and that they would decline as a percentage of revenue as the company grows. We will continue to optimize our corporate overhead cost to expand margins as we grow. Our free cash flow was negative $0.4 million in Q4, down from positive $0.7 million in the prior year. Free cash flow for Q4 2016 reflects approximately $0.4 million of cash generated by operating activities given the normal seasonal patterns in our marketplace business and $0.8 million spent on capital expenditures. Outside of our normal quarterly capital expenditures, we used $1.4 million to repurchase approximately 226,000 shares of our common stock under our stock repurchase program in Q4. In 2016, we used $4.9 million to repurchase 884,000 shares or approximately 4% of the outstanding shares. We continue to have a strong balance sheet with 51 million of cash available at the end of fourth quarter, while maintaining a zero debt balance. As a reminder, the seasonality of our Society6 business drives higher vendor and artist payables into Q1 of 2017, similar to what we experienced in Q1 of 2016. Other seasonal cash flow impacts in Q1 include our annual discretionary compensation payouts and taxes paid on vesting equity awards granted last year. As of December 31, 2016, we had federal net operating carry forwards of approximately $155 million, which expire between 2021 and 2036 and state NOL carry forwards of approximately $62 million, which expire between 2017 and 2036. Lastly, I would like to take a moment to discuss non-cash items, most notably amortization of intangibles. Non-cash amortization expense in the fourth quarter was $1.7 million, down 50% year-over-year figures the growth carrying value of our media content assets has decreased because have removed a significant amount of content from our media properties since 2015 and our acquisition related assets have been fully expensed. In Q4, we removed the low performing content of eHow and wrote down the carrying value of that content accordingly. As of December 31, 2016, we have a total of approximately $11 million of content and acquisition related assets on our balance sheet, which will amortize over future periods. Please note that we therefore expect amortization expense to be significantly lower in 2017 because of the lower book value of our content as we enter the year. Before I conclude, let me add a few guideposts for thinking about our 2017 financials. With continued growth in our marketplace businesses, strong progress in LIVESTRONG and renewed upward trajectory in our other media properties, we are optimistic that this progression will continue in 2017. On the operating expense side, we plan to continue to ramp our investment in marketing in our marketplace businesses to build brand awareness and attract new and repeat customers. In addition, we are investing in product and engineering talent there to improve engagement and conversion and most importantly grow revenue. Direct business unit costs may increase and impact EBITDA in the short or fuel future growth. We expect to continue to optimize infrastructure and corporate overhead expenses and those should increase relative to revenue over the longer term. As a company, we are very ROI focused, we maintain our commitment to achieve operating profit in future quarters, while balancing the near-term resource, and investment needs our businesses need for increasing growth on the top line. That concludes the financial summary and I will turn the call back over to the operator to open the lines for your questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Brian Fitzgerald from Jefferies. Your line is open.

[Unidentified Analyst:]

Hi guys this is Alex [ph] on for Brian. Thanks for taking our question. So, you have had nice success recently in growing repeat customers in both Society6 and Saatchi Art, can you talk about what’s driving the success there and maybe some overall thoughts on your strategy going forward as you look to convert the new customers you had during the holiday season and hopefully increase lifetime value? Thanks.

[Sean Moriarty:]

Thanks for the question Alex [ph]. There is several things that drive that and we look very, very closely in order to repeat conversion because it is, we think it is a single best proxy for the quality of the experience, the first time customer has. So, first and foremost that experience they have, the quality of the product, the quality of the interaction that they have with us, their happiness at the end of that transaction or when that package arrives on their door is key. We also engage those customers over time, so if they have a good strong initial experience with us, through our retention marketing efforts, we can continue to speak with them on an ongoing basis and that’s really important. That first experience sets up the success you’re going to have with those customers and when we talk about it internally, it’s not just new to repeat conversion, it’s how do we conduct ourselves in such a way where we are creating loyal customers or customers for life.

[Unidentified Analyst:]

Great, thanks Sean.

[Operator:]

Your next question comes from the line of Jason Kreyer from Craig Hallum. Your line is open.

[Jason Kreyer:]

Hi good afternoon and thanks for taking my questions. Just wondering if you can kind of compare and contrast the promotional activity that occurred in Q4 with potentially how you are thinking about that in Q1, and how that could impact both transaction levels and average order value?

[Sean Moriarty:]

Jason, that’s a really good question. I think we do believe a lot of the promotional activity that we and certainly every other online commerce players was really initiated by a lot of pressure on big box retailers who are under seized from the Amazon and others and created a lot of noise in the quarter. Our view was very simple, which is we think this is temporal. As long as we know there are high quality customers out there, if there is a slightly higher cost for us to acquire them, but they are again high-quality customers, they convert to repeat buyers and are loyal to our brands. We know that math pencils out for us over time. Rachel, do you want to provide a bit more color on that. You spent a lot of time internally in studying this.

[Rachel Glaser:]

Sure. So, I think one point that I will underscore that you said is that we believe that acquiring customers in Q4 despite the lower average order value, the long-term value of those customers is very valuable to us given the repeat rates that we have in the increasing growth in our repeat customers, plus we are able to interact and engage with them having captured an email and other things about them. So that’s the first thing if we consider all those customers to be great for us. The second thing I think we learned is that we, when we promote and I think promotional is the name of the game for any marketplace or e-commerce company, not just in Q4, but throughout the year, but when we promote we could be a little bit more clever and strategic about the pricing, so that we think about pricing in advance for the prices of the product we bring in the first place. So, we've got some work going on around that strategically looking at what’s the price points we want to start with these products out, so that we end up landing them, not necessarily taking that completely off of gross margin when we do rent promotion. So those are a couple of the things that we would be looking at going into 2017.

[Sean Moriarty:]

And to put a finer point on it, we feel very comfortable that despite the noise we saw in Q4 and we don't expect that to go way necessarily overnight, we will have the opportunity to continue to grow and scale this business by acquiring customers cost effectively and there are certainly a number of things that we will be doing which will allow us to cut through some of the noise in the channel, so as I - I think we learned a fair amount in Q4, we’re happy with the results although not blown away by them and feel very confident in our ability to kind of navigate this cycle for however long it persists.

[Jason Kreyer:]

On the same topic, just wondering if the average order value had any other influence from, like a mix-shift where there were certain product categories that were strong in Q4 that also force that average order value down, absent the promotional activity.

[Rachel Glaser:]

The one comment that I did - the one thing I did talk about in the script Jason was that it was impacted by the growth in mobile, because we do see slightly lower average order values on mobile, so that impacted a little bit.

[Jason Kreyer:]

Got it, okay. And then I just wanted to switch to media, you provided some additional metrics and you talked about the monetization of the views, off of your platform, I'm sorry, you talked about, the trends of views of your platform and I wanted to get some detail on how you monetized that differently, if you have somebody that views your pages on Facebook versus viewing the pages directly on eHow?

[Sean Moriarty:]

Sure. Most of our monetization is still direct to programmatic for an execution standpoint, so we are monetizing a direct to audience. We are looking to and have grown our brands presence across social media substantially from where they were, but we have a long way to go. We are focused on the near term through the social channels, much more on audience than monetization. We do think we can continue to improve yield in programmatic and sell direct and we are playing around again with monetizing in these social channels, but the core focus remains what it has been over the course of the past year. What I will say to is, I’m very heartened by the progress we’ve made with audience growth and engagement for these properties because we know that’s the first thing that advertisers and agencies look for when they’re contemplating spending their money with brands and we have brands that are back to health, that are growing and they resonate very deeply, certainly much more deeply than any time since I have been with the company.

[Jason Kreyer:]

Thanks Sean. Last one from me, just, if you have a little bit more detail on, you had talked about closing the gap in RPV on the eHow vertical sites, just wondering if you can give any sort of context on how long you expect it to take before we can fully close that gap or if ultimately we can fully close that gap or do we get to 80% of that gap, any additional color there would be great.

[Sean Moriarty:]

Yes, I think it’s a little tough to call because you're also impacted by macro trends with respect to advertising rates, but if you look at the success we’ve had in launching these new verticals in relatively short order, I think Rachel gave some color before on some of the improvement we saw in monetization from one of the verticals at least, you know we think this is going - this is probably a two to four quarter stretch for us to get monetization, where we think it’s healthy and consistent with the opportunity by category. Again that’s a bit back to the envelope, but we know that given what we’ve seen so far with respect to advertiser and agency demand as we introduce these new brands to people and what we know are the category monetization rates in these verticals, we should be able to get there over the course of the year and we should be able to share progress with you as we grow. This isn’t like you have to wait in the dark for a year. We will share with you as we learn, but we’re really confident in our ability to yield up monetization over time with these new verticals.

[Jason Kreyer:]

Great. Thank you for the detail.

[Operator:]

[Operator Instructions] Your next question comes from the line of Blake Harper from Loop Capital. Your line is open.

[Blake Harper:]

Hi, Sean you had mentioned about Amazon a positive sales channel for Society6 there, wanted to see if you could provide a little more color there and clarify, you did say the revenue number and if you can elaborate, do you see that as an effective channel where you can maintain your brand and keep your customers there, as far as RVP customers and are there similar type of marketplaces where you could do something tomorrow as well.

[Sean Moriarty:]

Great question. The way we view things, we need to build brands that matter that consumers care deeply about, so that those brands are never subordinate to a single distribution channel and I think we’ve done a very good job over the course of the past two years, building some fresh new brands that consumers really do care about. At the same time, we view these distribution channels, including massive ones like Amazon as really value add channels for us to optimize for, as long as there are hundreds of millions of shoppers looking for products, like the products that we offer for sale on Society6 and our other brands then we will seek to get in front of those consumers in the right way. And you know that really drives our thinking there. We want distribution platforms to be additive to our business, as opposed to our businesses being slave to them, and I think so far we’ve really struck the right balance. As you all know, the distribution channels kind of wax and lane over time as well. We go back five years ago and search was really the only game in town, all of a sudden you've got Facebook, you’ve got the rise of Amazon marketplace, you even have platforms like Pinterest and I think ultimately Instagram that can become very powerful distribution partners for you again, as long as you don't over index to a single one.

[Rachel Glaser:]

And Blake, did you ask if we gave a specific revenue number for Society6, was that part of your question?

[Blake Harper:]

Yes, it was.

[Rachel Glaser:]

So, we haven't broken out the three businesses now in our marketplace. We did say that Society6 revenue grew 20% year-over-year, transactions grew 28% and traffic grew 14%. The total for marketplaces was $22.6 million, up 23% year-over-year and the vast majority of it is the big growth in that mix of Society6. So, you should be able to get closer to what the number was based on that.

[Blake Harper:]

Thanks Rachel, and thanks Sean.

[Operator:]

Your next question comes from the line of Lee Krowl from B. Riley & Company. Your line is open.

[Lee Krowl:]

Hi guys thanks for taking my questions. Just the first one, with all these kind of investments and you know call it a two to four quarter time horizon, how do we think about gross margin trajectory, is it something that bottoms out at a certain point and then leverages higher or is it kind of an ongoing cycle of investment as you grow the business?

[Sean Moriarty:]

I think that’s a critical question on understanding what we are doing. We want to get to profitability, as quickly as we possibly can. We are building a valuable business over the long haul. So, what we focus on top line growth, gross margin expansion, and certainly right now a narrowing of losses, and those things kind of hold together. When you look across these young brands on the marketplace side or these brands that have been around a bit more established on the media side, that is a somewhat delicate balance for us, as long as we believe that incremental dollar of capital allocated over the long term is going to provide substantial value for our shareholders, we will index really focused on that high-quality top line growth and the proof in the putting for the quality of the revenue in the near term is you guys are looking at it, certainly should be gross margin expansion in the marketplace businesses and the narrowing of losses overall at the corporate level.

[Rachel Glaser:]

And Lee, if I could just add one thing, for us gross margin - all those types of investments that you we rattled off like investment in people and investment in marketing those would be below the gross margin line and the marketplace businesses. The gross margin would include direct cost of sales related to the product cost and the operational piece pieces, of getting call centre or things like that, so a lot of those investments, and maybe you meant contribution margin, I’m not sure, we should, we are looking to expand gross margin in the short-term, some of the marketing investments may be, you wait a quarter to see the yield on that, that over time as Sean said we're looking for a narrowing of losses on the bottom line and the expansion of gross margin, as we grow.

[Lee Krowl:]

Got it, that's helpful. And then I guess just adding on to that, as we think about for free cash flow, is there a breakeven time horizon because you guys kind of think about a high level?

[Sean Moriarty:]

I don't think I want to put a pin on a particular quarter, I think what we’d like to do along the way is give you enough color on the business where you should see the point at which those lines cross and the reason we do that is, given the - both the opportunity to drive substantial growth with meaningful upfront investment. The volatility, although the volatility in the media businesses has substantially increased, and we actually feel very good about those businesses, and having the flexibility for us, again to make those intelligent investments as we see them, you know we’re - I’m less focused on taking a point specifically in the future and much more focused on driving revenues and driving business progress that we can articulate to you guys on a quarterly basis and then as you watch those lines converge, I don't think that’s too far in the distant future for you to see, but again, we will take healthy growth in the acquisition of outstanding customers in the near-term all day long because we know that whenever we hit profitability, it’s going to be sustainable profitability that we can expand from.

[Lee Krowl:]

Got it. That makes sense. Last question from me is, in the media business you’re kind of talking about these new vertical opportunities, is it, it seems like it’s a very good opportunity to increase monetization longer-term, is there a way to kind of quantify the opportunity there in terms of number of new verticals, I know you guys mentioned that you expand on one, but is it a dozens of new verticals, one or two, I mean what’s kind of the opportunity there?

[Sean Moriarty:]

I think if you looked at what we’ve done is we’ve verticalized several categories on eHow, we have launched in pets, we’ve launched in tax, we’ve launched in lifestyle, we're going to be launching home a bit later this year, that’s probably seven or eight specific branded categories under the former eHow, then you have obviously LIVESTRONG and fitness and wellness and then our content channels, which we operate with partners, that’s a business opportunity that’s very rich currently includes dozens of channels and could be substantially larger than that, it’s a very efficient, effective business for us with a lot of room to grow. So, I think you need to understand the delineation between these very strong prominent brands that engage millions of customers, and then it’s lighter vertical content, which still has high value and resonates deeply, but it’s not going to acquire the capital nor is it going to have that same brand focus that eHow and LIVESTRONG and some of these young brands like Cuteness and Techwalla that we believe can become household names. If in fact they are not already are. In the case of LIVESTRONG and eHow, I’d argue that they are very well established and as they improve people are coming back to them and coming back to them, in the case of LIVESTRONG in record numbers.

[Lee Krowl:]

Got it. That's helpful. Thank you, guys.

[Operator:]

[Operator Instructions] Thank you ladies and gentlemen. This concludes today's conference call. You may now disconnect. Have a nice day.